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ESBies: safety in the tranches

Brunnermeier, Markus K., Langfield, Sam, Pagano, Marco, Reis, Ricardo, Van Nieuwerburgh, Stijn and Vayanos, Dimitri (2017) ESBies: safety in the tranches. Economic Policy, 32 (90). pp. 175-219. ISSN 0266-4658

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Identification Number: 10.1093/epolic/eix004

Abstract

The euro crisis was fuelled by the diabolic loop between sovereign risk and bank risk, coupled with cross-border flight-to-safety capital flows. European Safe Bonds (ESBies), a euro area-wide safe asset without joint liability, would help to resolve these problems. We make three contributions. First, numerical simulations show that ESBies with a subordination level of 30% would be as safe as German bunds and would increase safe asset supply. Second, a model shows how, when and why the two features of ESBies – diversification and seniority – can weaken the diabolic loop and its diffusion across countries. Third, we propose how to create ESBies, starting with limited issuance by public or private-sector entities.

Item Type: Article
Official URL: https://academic.oup.com/economicpolicy
Additional Information: © 2017 CEPR, CESifo, Sciences Po
Divisions: Economics
Finance
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HG Finance
JEL classification: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation
Sets: Departments > Economics
Departments > Finance
Date Deposited: 25 Apr 2017 10:46
Last Modified: 20 Jul 2019 02:31
URI: http://eprints.lse.ac.uk/id/eprint/74320

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